Management and Organizational Studies 2285 Lecture Notes - Lecture 1: Invisible Hand, Comparative Advantage, Product Engineering

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The nature of Businesses
- Corporations are separate legal entities, oligated to thei…
1. Owners (shareholders)
2. Customers
3. Employees
4. Community
- Legally required to make as much money as physically and legally possible
- Increase profit to aiize shaeholde’s ealth
- Profit is earned in two ways:
1. Lowering costs
- More efficient operations
- Procurement of less expensive raw materials
2. Increasing Revenues
- Innovation: new products or features that create more sales or higher sales prices
- Creating new markets for entire industry
- Taking share from competitors
What drives globalization?
- Efficiency drivers make more money by lowering costs
- Increased competition
- Investor expectations
- Market expansion drivers: make more money by selling more stuff to more people
- Saturated domestic markets
- Product characteristics that are transferable across borders
- Innovation
Globalizing it’s not so easy
- Local conditions are still relevant
- What works in one country may not work in another it goes beyond products E. What is seie, ualit,
how do different perceptions effect costs?
What facilitates globalization?
1. The decline of barriers of movement of goods, services, investments, skills, etc.
2. Technology: computers, transportation, communications, etc.
The business environment
- Businesses operate in complex environment, often full of uncertainty and turmoil
- Uncertainty makes it difficult to operate efficiently
- Four main aspects of the global business environment which diffe ad ease uetait ad opleit…
1. Social systems
- The system of shared beliefs, values customs and behaviours culture
- Different cultures have different perspectives toward many different issues including, religion, human rights,
and role of business
2. Political Systems
- The system of national or regional governance
- Collectivism vs. Individualism Socialism and Communism
- Democracy vs Totalitarianism Freedom and repression
3. Economic Systems
- The system in which commerce is conducted
- Market Economy: The invisible hand
- Command Economy The visible hand
- Mixed Economy: The gentle hand
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4. Legal Systems
- The system through which government enforces its regulations
- Different Legal Systems: Common, Civil and theocratic
- Rule of law or personal whim affects: contracts, property rights, intellectual property, product safety and liability
Implications for businesses
- Operating an international business is a tricky thing there are no guarantees
- You have to understand the business environment into which you are entering very well if you are going
succeed, but you still might fail
- Knowledge, understanding and patience are key
Why do businesses Go Global?
- Firms seek to increase profits through international production and sales.
1. Two General Strategies
2. Efficiency: Producing at a lower cost to provide more value to consumers than competitors
- Market expansion: Added value products so consumers will pay more for it, or more consumers will buy it
- Efficiency Drivers: make more money by lowering costs.
- Forced to be efficient by: Increased competition & Investor expectations
- Market Expansion Drivers: make more money by selling more stuff to more people
- “ell to othe outies he
Domestic markets are saturated
Product characteristics that are transferable across borders, seeking innovation from other
- Fis a eoe oe effiiet o epad thei akets  eploitig thei o o aothe out’s Natioal
comparative advantage
- National comparative advantage: different resources endowments or competencies or cost advantages that are
prevalent within and relatively unique to a given country or society
- Examples: India software development, Japan Micro electronics, automobiles, Germany Product
engineering, Chemicals, Switzerland Banking, pharmaceuticals
National comparative advantage
- Depedig upo hat akes up a out’s atioal opaatie adatage, it a e a good o ad plae fo a
firm to internationalize
- Whether the country fits, the fi’s eeds deped upo hat the fi eeds to compete a strategic decision
- Out Sourcing: refers to the tendency among many firms to source goods and services from different locations
around the globe
- Firms evaluate the cost of production in different regions and move facilities around if the cost rise in one area
vs. another (portfolio perspective)
- If thee is a fit, a out’s atioal opaatie adatage a poide eefits i tes of eithe ipoed
efficiency or increased market share or both through: Location Economies & Economies of Scale
Locations economies
- Operating internationally allows firms to gain greater efficiencies by capturing Location Economies:
Locating different value chain activities in the optimal location (regardless of which country it is)
to capitalize on lower factor costs (labour, raw materials, transportation, regulatory compliance
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